The Texas laws that bar underwriters with discriminatory policies against the oil and firearms industries may force municipalities to face higher borrowing costs as a result of less competition among underwriters.

That’s according to a new paper that was dissected during the Brookings Institution’s 11th annual Municipal Finance Conference Monday. Its authors Daniel Garrett, an associate professor of finance at the University of Pennsylvania’s Wharton School and Ivan Ivanov, an economist at the Federal Reserve, presented their findings.

“If we focus on those really most exposed borrowers, we say those municipalities with more than half of your previous bonds underwritten by these banks, that you have almost a 40-basis point increase in your borrowing costs,” Garrett said. “This is economically massive.”

Texas is one eighth of the entire muni market and issues around $50 billion in municipal bonds every year.

The authors estimate that municipal borrowers across the state generally will have to pay $300 million more than they would have had the state not instituted these restrictions.

Banks such as J.P. Morgan, Citigroup, and Bank of America have instituted policies that ban their own involvement in transactions related to firearms sales. This has led to increased underwriting costs for Texas municipalities as the underwriter base shrinks. 

“The Texas law highlights how governments can respond to ESG policies and attempt to punish banks,” Garrett said. “Banks do leave the market and affected governments incur higher borrowing costs and reduced access to external finance.”

It also showed that those issuers who were previously reliant on those underwriters that exited the market, are much more likely to negotiate pricing than hold an auction.

There could potentially be some new entrants into the Texas underwriting market, but it likely won’t have much of an effect on bringing borrowing costs down to what it once was, Garrett said.

The study analyzes 8 months of borrowing activity but in that period alone, increased interest payments for borrowers have increased somewhere between $303-$532 million.

“Economies around the world that attempt to undo ESG policies through the financial sector are likely to face adverse consequences as selected banks leave markets,” Garrett said.